The truth of the matter is that federal taxes in the United States are very low. There is no reason to believe that reducing them further will do anything to raise growth or reduce unemployment.

So Peter Schiff and you other ego-bloated plutocrats from HedgeFund-istan (aka Greenwich, Connecticut), give it a rest. And please don’t tell us the solution is a value added (consumption) tax. Just pay your damn taxes.

Monday, May 30, 2011

There's a Right Way and a Wrong Way to Deal With a Jobs Crisis -- Why Is Germany Doing It So Well? | | AlterNet: "Denmark's success is widely attributed to its 'flexicurity' system, which provides flexibility to employers and security to workers. Flexibility comes in the form of limited job protections for workers. In the United States, private-sector workers have almost no legal rights to their jobs and, absent a union contract, can legally be fired for almost any reason. In Europe, however, workers have a range of legal protections against dismissal. Denmark has more protections than we do here, but noticeably less than workers in the rest of Europe.

Danish workers accept less job security because they know that national unemployment benefits are generous and the system spends real money getting unemployed workers into new jobs. This is the 'security' half of the 'flexicurity' system."

Sunday, May 29, 2011

Uwe E. Reinhardt: The Case for Higher Taxes - NYTimes.com: "We are now seeing this adolescent posture on fiscal policy playing out once again, as voters angrily react to the recently passed House of Representatives budget plan. And it explains why my friend and fellow economist Eugene Steuerle of the Urban Institute, who served at the Treasury under President Reagan, has aptly and with exasperation named his periodic column on United States fiscal policy: The Government We Deserve.”"

This is a must-read. The Republicans, Ronald Reagan and company, started us down the road of "the politics of joy," cutting taxes without cutting spending. Today, they will blame Congress, saying Congress didn't cut spending, but back then, they sold the country a bill of goods with a completely unsupported "theory" called "supply side economics," sold by one of the great charlatans of modern economics, Arthur Laffer. Laffer said that increased economic growth would pay for the spending. Didn't happen. Instead, as the federal deficit skyrocketed, the President and Congress were forced to do a 180 and enact the biggest tax increase in American history as the economy was staggering out of recession.

And as I have written and the article documents, Georgy-Porgy put the nail in the coffin with his tax cuts.

Note that Reinhardt ignores the contractionary effect of higher taxes. The distribution is in effect the only issue in macroeconomics today.

Philip Pilkington: Beyond growth – are we entering a new phase of economic maturity? argues that Japan’s lost decades were not so bad when you look at social welfare, a dimension that eludes Paul Krugman. Japanese aggregate debt to GDP climbed to levels far beyond where America is now, and mirabile dictu, life expectancy increased and in general social welfare remained very high relative to barbaric American standards. Pilkington is citing work by Modern Monetary Theory proponent Bill Mitchell. I have been hard on MMT because it shares all the weaknesses of fiat money systems—and in fact exploits them to advance social welfare. In Japan’s case, they were able to assume staggering amounts of debt because they are a high saving society and largely owed it to themselves. Their currency remained strong, there was no hyperinflation, and people hung together. (There is a larger question: the societies with very high kinship coefficients across the population such as Japan and the Scandinavian countries seem to be satisfied with government services requiring much higher levels of taxation than Americans put up with; are content with much flatter income and wealth distributions; and also score happier on many measures of general happiness.) This is not to say that Japan shouldn’t have shut down their zombie banks and purged the bad debt from the books—they would have been even better off if they had; but powerful interests being what they are, they didn’t. Just as America is proving incapable of writing off its bad debts, instead pursuing the illusion that the banking system will recapitalize over time if interest rates are held low enough for long enough. The pin that pricks this bubble, I believe, is the off-balance-sheet derivatives exposure to the housing market that has not yet cleared. If the housing market continues downward, how many CDSs will be triggered? And how will the Fed attempt to bury those bailouts from the public? And will they be able to?

The difference between Japan and America, of course, is the level of social cohesion and shared sacrifice. The Japanese pull together. America is being pulled apart. I applaud the agenda that proponents of MMT seek to achieve by printing money, I just doubt that those objectives would be achieved in the United States by printing money. So far, the evidence suggests most stimulus monetary or fiscal goes into the pockets of the well-heeled.

Americans need to forge a new social contract soon or descend into decades or centuries of grinding neo-feudalism, by which I mean banana republic-style inequality and its attendant inefficiency. America’s greatest resource is her people, and if the people lose heart, they become wage slaves on the plantation. History teaches that vast inequalities always fuel revolutions, sooner or later. If we lack genetic ties, we need to cling to the classic American ideals of fairness and freedom and equality before the law. Adam Smith maintained that capitalism without a moral context—think of the medieval doctrine of “fair price”—cannot succeed in anything but crass exploitation.

Why the U.S. GDP number may be as bogus as a three-dollar bill - The Globe and Mail: "People would have a truer gauge of the economy’s performance if the government provided what he calls “structural” GDP, which does not include debt-financed consumption. Currently, per capita GDP in the U.S. is not far off an all-time high. But excluding deficit spending, the real number is 10 per cent below the peak reached in 2007. Indeed, it has fallen back to levels not seen since 1998."

J.P. Morgan's hunt for Afghan gold - Fortune Management: "To Hannam, chairman of J.P. Morgan Capital Markets, Afghanistan represents a gigantic, untapped opportunity -- one of the last great natural-resource frontiers. Landlocked and pinioned by imperial invaders, Afghanistan has been cursed by its geography for thousands of years. Now, for the first time, Hannam believes, that geography could be an asset. The two most resource-starved nations on the planet, China and India, sit next door to Afghanistan, where, according to Pentagon estimates, minerals worth nearly $1 trillion lie buried. True, there is a war under way. And it's unclear how the death of Osama bin Laden will impact the country's political and economic environment. But Hannam is not your usual investment banker: A former soldier, he has done business in plenty of strife-torn countries. So have all the members of his team, two of them former special forces soldiers who have fought here."

Economics in Crisis [Denial] – J. Bradford Delong. What’s really wonderful about Delong’s comments is that he pretends the economists knew all along what was going to happen, only they didn’t think it would be so bad. This is really rich as the economists missed all the signature characteristics of imminent depression like increasing income and wealth inequality, asset bubbles, and massive increases of aggregate debt-to-income ratios. A more complacent and self-satisfied economist is hard to conceive of—the nail in the coffin being his defense of Larry Summers’ defense of economists. They just got distracted… by being whoring agents of the thieving Wall Street elite. Be a man and call a spade a spade, will ya, Brad?

Friday, May 13, 2011

President Obomba has spoken of how the president he most resonates with is Lincoln, who unified the country by winning his side of a civil war. Obomba sees a country sharply divided and unequal, and would like to unite it and restore social cohesion. However, the mythology inside the Beltway posits that what the country needs now is a war against a big bad external enemy—and possibly a [another] “Pearl Harbor of the 21st century” to kick things off. The empirical support for war bringing greater social cohesion comes most authoritatively from Emmanuel Saez’ charts on tax return income inequality that show that it was indeed WWII that in the span of little more than the year 1942 erased the dramatic income inequalities of the 1920s Gilded Age that persisted through the Great Depression. It was all for one, and one for all.

So what might President Obomba be thinking now, with the help of his George W. Bush-era advisors? How about region building? Perhaps it’s time to finish the job that QE2-fueled commodity price inflation, Facebook and Twitter started in the Middle East—and just chop the heads off all the dictators we’ve been propping up for decades? Get some democracy going—unless it’s that Muslim Brotherhood, and then we’ll just go in and clean up again. We’re going for the kill on Kaddafi, why not all the others? It’s the American way. We use you till we screw you. It’s our oil, after all, as they say in Houston.

The President is about to be awarded the extra-legislative power to wage world war. I expect the domestic psyops and propaganda to increase exponentially in coming months. What better way to win an election than to be at war?

Tucked inside the National Defense Authorization Act, being marked up by the House Armed Services Committee this week, is a hugely important provision that hasn’t been getting a lot of attention — a brand new authorization for a worldwide war.

This stealth provision was added to the bill by the committee’s chairman, Rep. Buck McKeon (R-Calif.), but has a bit of a history. It was first proposed by former Attorney General Michael Mukasey in 2008 after the Bush administration lost the Boumediene v. Bush case, in which the Supreme Court decided that federal courts would subject the administration’s asserted law of war basis to hold Guantanamo detainees to searching review. An idea that may have originally been intended to bolster the Bush administration’s basis for holding Guantanamo detainees is now being promoted as an authorization of a worldwide war — and could become the single biggest ceding of unchecked war authority to the executive branch in modern American history.

The current authorization of war provided the constitutional authority for the executive branch to go to war in Afghanistan. Subsequently, it has reportedly been invoked by the executive branch much more broadly to also use military force in Yemen and elsewhere, to justify torture and abuse of detainees, to eavesdrop and spy on American citizens without warrants, and to imprison people captured far from any battlefield without charge or trial.

Before Congress this week, the proposed authorization of a worldwide war goes much further, however, allowing war wherever there are terrorism suspects in any country around the world without an expiration date, geographical boundaries or connection to the 9/11 attacks or any other specific harm or threat to the United States. There have been no hearings on the provision, nor has its necessity been explained by Rep. McKeon or anyone else in Congress.

Thursday, May 12, 2011

Via: Economist’s View It is so difficult to fight the hysteria emanating from the right and validated by Obama. The disinformation is incredible. It kills me when I hear that “half of Americans pay no federal tax,” as if the payroll tax wasn’t a federal tax, and a highly regressive one. If flat taxes are so great, why don’t we start with the payroll tax?

1) Over the next 75 years, Social Security’s shortfall is equal to about 0.7 percent of GDP. Source (PDF).

2) For the average 65-year-old retiring in 2010, Social Security replaced about 40 percent of working-age earnings. That “replacement rate” is scheduled to fall to 31 percent in the coming decades. Source.

3) Social Security’s replacement rate puts it 26th among 30 Organization for Economic Cooperation and Development nations for workers with average earnings. Source.

4) Without Social Security, 45 percent of seniors would be under the poverty line. With Social Security, 10 percent of seniors are under the poverty line. Source.

5) People can start receiving Social Security benefits at age 62. But the longer they wait, up until age 70, the larger their checks. Waiting to 66 means checks that are 33 percent larger. Waiting to 70 means checks that are 76 percent larger. But most people start claiming benefits at 62, and 95 percent start by 66. Source.

6) Raising the retirement age by one year amounts to roughly a 6.66 percent cut in benefits. Source.

7) In 1935, a white male at age 60 could expect to live to 75. Today, a white male at age 60 can expect to live to 80. Source.

8) In 1972, a 60-year-old male worker in the bottom half of the income distribution had a life expectancy of 78 years. Today, it’s around 80 years. Male workers in the top half of the income distribution, by contrast, have gone from 79 years to 85 years. Source.

Among his comments, my preferred solution:

Social Security’s 75-year shortfall is manageable. In fact, it’d be almost completely erased by applying the payroll tax to income over $106,000.Source (PDF).

Wednesday, May 11, 2011

The February value of the index was 153. The 30-year mortgage rate is about 4.7 percent. If and when long-term interest rates go up just 150 basis points, housing prices in aggregate might be expected to take a further hit in the neighborhood of one third.

Here is the chart for the Composite-US series beginning in 1987. A rise in mortgage rates to 6 percent would imply a further 20 percent fall in house prices. And that assumes no overshooting.

P.S. Having just had the opportunity to compare OSX and Windows 7 directly and to get my new computer tweaked to my liking (I deleted all Dell’s bloatware) I must say that Win7 is a pretty good imitation of OSX. Taskbar = dock, lots of graphical niceties, and with 8 gig RAM and a quad-4 CPU, Win7 does its “ontogeny recapitulates phylogeny” schtick pretty quickly and without too many annoyances. So convergent evolution appears to have worked okay in this instance.

Monday, May 9, 2011

“Animal spirits” or confidence levels of Americans have been depressed for several years now, but the surprising result of the approach taken here is that there is no collapse of “animal spirits”—which I take to be the salient aspect of a business slump—in sight.

Proceeding from the fundamentals of psychology, adaptation level theory, and the natural preoccupation of Americans with their employment status, given America’s “flexible” and not terribly labor-friendly labor markets, I argue that the primary driver of Americans’ confidence levels is the difference of the current employment rate and an adaptation level in memory from the past several years (with exponential weight declining into the past):

A = – (U – UMEAN)/std(U)

where A is “animal spirits,” U is the unemployment rate, UMEAN is an exponentially weighted moving average over the past 48 months, and std(U) is the standard deviation of the unemployment rate over 48 months.

Business slumps are generally marked by a sharp downward jag of the A indicator. There was a brief false positive in 1963 that lacked follow through, and a collapse from negative levels of A and confidence in the early ‘Eighties double dip recession, but otherwise the onset of a recession always has occurred in the past 50-plus years as A approached the zero line from above, crossed zero, and accelerated downward. This can be motivated by considering confidence as a form of psychological wealth, subject to steeper utility discount for losses than gains.

The adaptation level is now at 8.4, the actual unemployment rate at 9.0. If unemployment falls to about 8.5, and the adaptation level rises to 8.5, there will be a potential trigger effect to greater confidence. (I am simply following empirical history here, the assumption being that people still pay the most attention to the headline rate, even as numerous analysts blast away at it credibility, and the Labor Department’s own figures show that most the improvement in the headline rate in recent months has come from people leaving the labor force.)

There is persistence to social psychology. Currently, people desperately want to feel good. The Chinese call it yin and yang. You can’t feel bad forever. If the labor market cooperates and the Labor Department is able to publish a declining unemployment rate over the next several months, the business cycle may enter a phase of positive “animal spirits.”

I will guess that this will happen, for variety of reasons. It doesn’t mean the economy is healthy, it just means people’s psychology has changed, for however short a time.

The other reason to believe there is no pronounced slump in prospect (as distinguished from the economy persisting in a low-grade depression, as most Americans believe it to be doing) is that the yield curve is very steep. Now John Hussman has argued that in a ZIRP environment, the yield curve loses predictive power. He alleges that it did so in Japan during the ‘Nineties, and in the United States in the ‘Thirties. I use a 1-year rate rather than the 3-month T-rate with the 10-year T-bond rate to try to avoid this problem. The yield curve is very steeply sloped. Also, close examination of the Japanese data (here) shows that simply adjusting for ZIRP by looking at whether slope falls below about 1 percentage point is predictive; flattening of the yield curve still predicts. In the American case, if the 1/10 slope falls to less than about one, it’s also probably a safe bet a recession is coming. That would be the OK Corral for QEn.

Putting the “animal spirits” variable together with the yield curve in a logistic regression recession forecasting model using the slope of the yield curve and A from a year before produces a very accurate forecasting model that has forecast the last two recessions in real time well ahead of the clueless professional business economists (whose real job is cheerleading anyway).

Here is what I expect the social psychology of the next couple of years to be like: by hook or by crook the unemployment rate will decline to 8.5 within the next year. There will be an eerie, probably short-lived period of hope that our fiscal-monetary checkmate will be avoided. Remember, Richard Nixon was elected in 1972 and went on to be the most fiscally irresponsible president of the postwar period up till then (George W. Bush took the prize later). Nixon tried the methods of the Soviet Union—price controls, central planning—to get us out of the mess of guns and butter inflation. And of course he took us off the gold standard, creating the monster of Bretton Woods II that is now in the process of going super nova as fiat currencies around the world race toward worthlessness and the money changers salivate over the new bubbles to exploit popping up all around them.

So as in 1973, the collapse could come shortly after the next presidential election, in about 2013. America is set up for a great demand deflation, as 70 million baby boomers without sufficient assets to retire at a standard of living consistent with what they’ve had while working try to keep jobs in a stagnant American labor market that is employing the smallest fraction of the population in thirty years. The collapse could be delayed if America enters a world war and labor is conscripted, legislatively or morally, and—mirabile dictu—the distribution of income were to become more equal in a spirit of shared sacrifice as happened during World War II, after the last age of inequality and excess.

Thursday, May 5, 2011

Well, I had a MacBook Pro for about three weeks. The Windows partition proved to be unstable. Hm…. In that three weeks I got to compare OSX and Windows 7 side by side. OSX works a lot better. The latest Firefox runs fine, applications load quickly and stably—although few of my must-have applications run under OSX (a game, primarily, but I was also disappointed in the blogging software I was able to find).

The problem with the Windows partition was that after getting it set up and running it a few times, it would fail to boot up, and I would have to go to the Mac side. There are people all over the Web screaming about this.

And even in Windows 7 in a clean install I was spending a lot of time fixing things. A hobbled-together operating system has a long way to go to achieve Unix-based clarity by convergent evolution.

I was faced with the choice of spending about a thousand dollars more to buy a new Mac with the same features I could get in a loaded XPS laptop—HD, HDMI, 750 gig HD, 8 gig RAM, i7 quad core, you get the idea—so I got the 15” XPS. I’d bought a refurbished 2010 MacBook pro the first time, and there was no guarantee that a 2011 wouldn’t have the same problem with the Windows partition.

So I get it tweaked, drop the bloatware, get the latest 4.01 Firefox set up, and what do I find? Windows interrupts my browsing with a pop-up that says, “Firefox has stopped working. Windows will investigate and try to find a solution.” Right. I’m waiting.

Problem is all over the Web. For crying out loud, Microsoft. I installed IE 9 but gagged on that and quickly installed Chrome.

I’ve got my HD backed up and will be loading the econometrics software soon to do the “animal spirits” update.

Aesthetically, I will say that Dell has gone about halfway in terms of design with the new XPS 15” models, with an aluminum top and main surface around the back-lit chiclet-style keyboard. But those stupid stickers are driving me crazy… “Energy Star!”, “Intel Core i7!”, “Windows 7”! Where is the nail polish remover…?

The soaring flight simulator is up and running fine so I can race against my competitors around the world again…. And Apple is taking their system back and refunding my AppleCare without penalty. I wish they’d gone after market share a long time ago. They’ve got a great product.

Tuesday, May 3, 2011

I will be returning the MacBook Pro today or tomorrow and will not be posting until I have my new computer, scheduled for delivery late next week. The only other functioning computer in the house is a netbook that is not suitable to the task.

One of my first posts upon return will be to update the outlook for "animal spirits." With the economy and confidence as weak as they already are--more than half the American public believe we are in a recession or a depression now (take that, you NBER fools!)--the only question that matters in macro forecasting is when confidence will fail. Everybody's best guess: 2013.

Inequality continues to increase, as those above punish those below, and a more complete unraveling of the social contract awaits. My hope is that the mythology of "free markets" and "private property" will be replaced by a commitment to "capitalism operating within a moral framework," including a just "welfare maximizing" distribution.

Sunday, May 1, 2011

Paul Samuelson accurately noted that in an inflation every fool fancies himself a great financier. It might be added that highly leveraged real estate speculators who made fortunes off the Great Accommodator's largesse are the greatest fools.

Aside from being a jackass, Trump belongs to that category of what I call Bubble Boys, those "investors" who made fortunes by leveraging one way or another themselves through the inflation of the Greenspan years. Trump, Mozillo, et al.

It would be a gift to the Republican Party if Trump runs for President. I do sometimes wonder if Trump, whose sympathies allegedly have been mostly with Democrats in the past, is not doing this much as Ross Perot did years ago apparently to torpedo the Republicans' chances.

Independents decide Presidential elections. The independents will not vote for Trump.

***

P.S. The Windows partition on the MacBook Pro has proved unstable, and I am having to return the Mac and wait for a loaded XPS laptop to arrive in a couple of weeks.